January 28, 2014

Tax Form 1099-K: What Do I Do with It?

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There’s that
old sinking feeling again – you see a tax form in your mailbox and you have no
idea what it is! It could be something completely benign or the worst piece of
paper you’ve ever held between your shaky fingers. You open it up and see it’s
the 1099-K.

Wait, what
is that again? You feel like you’ve seen this before but can’t quite recall
what it does or if you should be terrified. Perhaps that’s why you clicked on
this blog post in the first place so you could react properly to the news.
Let’s take a look at the 1099-K and what it means for you and your business…and
why you shouldn’t be so afraid right now.

What is the form?

The 1099-K
is a tax form that is used by payment processors like PayPal or Etsy Direct
Checkout to report how much sellers made throughout the year. Before this form
there was no good way for the government to track this information. They
suspected that many sellers were misrepresenting how much money they were
actually making so they began requiring payment processors to send out this
form every year.

If you’re a
seller on Etsy and use PayPal for your transactions, PayPal will send you a
1099-K to report how much you made. They also send the IRS a copy so they know
how much you made. And that’s really about it – it’s simply an informational
tool and to help the government crack down on fraudulent tax reporting.

Who gets it?

However,
just because you sell online doesn’t mean you’ll automatically get the 1099-K.
In fact, many sellers on sites like Etsy or Amazon won’t get one, as they don’t
make enough money. It’s only for top sellers for now.

You must meet
the two following criteria to receive the form:

-Make $20,000
or more

-Sell 200 or
more items

If you don’t
meet both of those, you won’t get the form. If you do, expect to see it in your
mailbox by the end of January/beginning of February.

What to do with it?

So if this
tax form merely reports how much you made through a certain website or payment
provider, is there anything you can actually use it for? It’s a good question,
and while it is primarily an informational one, you can use it for your tax purposes.

For
starters, it gives you a good idea what you made through the year if you
haven’t been tracking your own finances. Now you have something to work against
when you start your taxes for April. However, it is always a good idea to do
your own finances or sign up for GoDaddy
Online Bookkeeping to keep your own accounting of income (and expenses)
just in the case the 1099-K has incorrect information on it. You don’t want two
different totals going to the IRS or for something to come up down the road.

Also, just
because the IRS sees a big total doesn’t mean all that total was profit for
your business. You’ll be able to deduct your business expenses when you file
your Schedule C (self-employed) tax form in April. Make sure you’re tracked
your expenses, or the IRS will think the amount on your 1099-K is pure, taxable
profit.

After you’ve
filed your taxes, put the 1099-K in a safe place with your other tax forms.
It’s good to keep everything on file for at around seven years…just in case.